Global supply of the highest-quality bonds, as measured by ratings companies, is poised to fall to $6 trillion from $10 trillion before the global financial crisis, according to an International Monetary Fund report in January. Reforms such as the Dodd-Frank financial-overhaul law and global regulations set by the Bank for International Settlements in Basel, Switzerland, require institutions to hold more top-graded debt as a cushion against potential losses.

“The shortage of debt and the sluggish recovery and employment situation have paved the way for low yields for some time,” James Sarni, senior managing partner at Payden & Rygel in Los Angeles, which oversees $75 billion, said on March 6 in a telephone interview.

While Treasuries have lost 1.13 percent this year, the worst start since 2009, the bull market for bonds that began in 1980 has shown few signs of reversing. Since the 2008 collapse of the subprime-mortgage market triggered the worst financial crisis since the Great Depression, government debt maturing in 10 or more years has returned 48 percent, compared with the 28 percent gain for the Standard & Poor’s 500 stock index.

Longer term, the best may be over for bonds, according to Zach Pandl of Minneapolis-based Columbia Management Investment Advisers LLC. He says Treasuries may have zero total returns for the next two years.

Inflation ’Overshoot’

The market expects inflation to rise, according to the 10- year break-even rate, the difference in yields between government notes and Treasury Inflation Protected Securities. This measure has increased to 2.58 percentage points from a 2012 low of 2 percent in January. Yields will rise to 2.26 percent at year end, according to the median forecast of analysts in a Bloomberg survey.

“Given the improving economy and the depressed levels of rates, investors aren’t being compensated enough in Treasuries and rising rates make sense,” Pandl, senior interest-rate strategist for Columbia, which oversees $340 billion, said in a telephone interview March 6. “Everyone recognizes that the Fed is pursuing an aggressive policy that raises the probability of an overshoot of their inflation target, even as inflation is still low and employment still high.”

For now, demand is being boosted by the better returns, converting bond bears to bulls as 10-year notes gained 1.24 percent in February, reversing in part the 1.98 percent losses from January, according to Bank of America indexes.

“Relative value has swung more to the favor of Treasuries,” Gundlach, whose Los Angeles-based DoubleLine manages about $53 billion, said in a March 5 webcast. After telling investors that Treasuries were overvalued in July, DoubleLine resumed buying government securities when yields rose, he said.

Policy makers cut their target interest rate to a range of zero to 0.25 percent in December 2008. Last year they said it will stay there while unemployment remains above 6.5 percent and inflation is no more than 2.5 percent. The Federal Open Market Committee said at its January meeting it will continue asset purchases until the labor market improves “substantially,” according to minutes released on January 30.